Contractors' Questions: Is inside IR35, agency PAYE or umbrella PAYE best from April 2020?

Contractor’s Question: I appreciate there are a number of variables that will skew the bottom line but generally-speaking, what’s the best option as a limited company contractor from April 6th 2020  – work inside IR35, join the agency’s payroll or, work via an umbrella company?

Expert’s Answer: If the tax rules are applied correctly and your agency has correctly calculated the ‘PAYE rate’ versus the ‘Limited Company rate,’ then all options should return broadly the same take-home pay. The only variables will be the associated costs.

Continuing to work via your Personal Service Company (PSC), where the hirer has deemed you to be inside IR35, means that employment taxes will be withheld from the payment made into your PSC and you will still incur the costs of accountancy fees and maintaining your Professional Indemnity Insurance (required in most contracts). 

These costs will be taken from the net pay. This is not a particularly tax-effective way of operating, and you will also have to continue filing accounts, tax returns and maintain your director responsibilities. However, if the ‘Fee-Payer’ is paying the Employer NIC on top of your contract rate and has not negotiated your rate down to cover this cost, then this way of working may still be attractive.

Alternatively, you could consider working via the agency payroll (if they have one) or via an umbrella company. But with the latter type of company, make sure it is compliant though and not a loan scheme or similar tax avoidance arrangement (picking from the FCSA’s list of accredited providers is our recommendation). 

The benefit of agency payroll is that it comes at no cost to you. The benefit of umbrella payroll is that it offers you continuity of employment (if you find roles via multiple agencies), which can help with mortgages and loan applications and also avoids the fluctuations in tax codes that could arise if you work on multiple different agency payrolls. 

Many umbrella companies now offer other benefits such as a staff discount scheme. There is a cost to working through an umbrella company however, which varies depending on the quality of service, timing of payments to you and availability of staff benefits.

Lastly, be aware that you may be offered alternatives which seek to enhance your take-home pay – but any alternative ‘arrangement’ which seeks to minimise employment taxes and maximise take-home pay carries a health warning and should be properly researched. One of the outcomes of the public sector IR35 changes in 2017 was the proliferation of tax avoidance schemes which will no doubt be marketed hard in light of April 2020’s extension to the private sector of the change, yet HMRC are aware of this and on to them.

The expert was Matt Fryer, director of compliance at Brookson Legal.